My brother recently contacted me to ask how to invest a thousand dollars. He was thinking about opening a Roth IRA, but he wanted to know if that was the best place to put his money for the long term. I was happy to hear he wants to start a savings plan. It’s always a good idea to invest for the future. But sometimes investing for retirement isn’t the best way to use your resources. Some people would be better off investing in a non-retirement fund, or using the money for something else, such as creating an emergency fund, or paying off debt. If you are a new investor, or you have a $1,000 you want to invest, then these tips can help you determine your investment goals, and help you reach them.
How to Invest a Thousand Dollars
Be sure investing is the right decision.It’s great to save up $1,000, and even better to want to do something productive with those funds. An investment is a good way to make your money grow, and help you prepare for the future.
But sometimes investing isn’t the right decision. If you have high interest debt, such as a credit card, personal loan, or car loan, then it may be better for you to use the money to pay off your outstanding loan balance. You will get an immediate return on your investment, and you will free up monthly cash flow, which will make it easier to replenish your savings, and invest again in a few months.
The other consideration is preparing for emergencies. If you have a decent emergency fund and are prepared to handle an unexpected financial situation, then investing may be a good idea. If you don’t have an emergency fund in place, then consider building your rainy day fund first – that way you don’t have to withdraw your investment shortly after making it. Remember, investments can lose money, and the last thing you want to happen is to need to withdraw your investment during a downturn in the market.
Always start with an investing goal. The first step of any investment is to begin by determining your investment goals. Every decision you make needs to reflect your investment goal. In most cases, your investments will fall into two buckets medium term, or 5-10 years, or retirement. If you need the money in less than five years, you are saving, not investing. Your time frame will also help you decide if you need to invest in a retirement account, such as an IRA or 401k, or if you should invest in a non-retirement account, which gives you access to your money more easily, and without the likelihood of penalties or fees.
The case for a short term investment. If you are planning on buying a home in the next 5-10 years, paying for your children’s college, or otherwise plan to access your money in the next few years, then consider investing in a non-retirement account. This will give you access to your money when you need it, without having to worry about early withdrawal penalties that can occur when you withdraw retirement funds before retirement age.
The case for retirement investing. Retirement investing gets a lot of publicity, and with good reason: very few companies offer pension plans, and social security benefits may not be enough to fund your retirement. The more money you put away now, the more time you have for compound interest to work it’s magic, and the less you will have to worry about retirement investing in the future. The only downside to putting a lot of money away for retirement is the inability to easily access the funds without penalty. If you think you will need the money in the near future, then consider investing in a taxable (non-retirement) fund.
Related info: More information on Cash Savings vs. Retirement Savings.
Roth or Traditional? If you decide to invest in a retirement account, your next decision is to go with a Traditional or Roth IRA or 401k. Here is the basic difference: Traditional IRAs and 401k plans offer a tax break on your income now. Your contributions are tax deductible (up to certain income limits), and your investments grow until you retire. Once you reach retirement age, you can begin making withdrawals from your retirement accounts, and the withdrawals will be taxed at that time. Roth retirement plans are taxed in an opposite manner. Your income is taxed today and it will grow tax free until retirement age, at which point you can make tax free withdrawals. Roth retirement plans are almost always better, especially for younger individuals, and those who are earning less money (because they have more time to let the earnings grow tax free, and lower income earners are in lower tax brackets). Here are some more articles which might be helpful in understanding the differences among the IRA plans, IRA contribution limits, and Roth IRA withdrawal rules.
Where Should You Invest $1000 Dollars?
Great – you’ve decided you are going to invest a thousand dollars, but now you don’t know where to start. I get it. There is a huge investment world out there, and it can be intimidating. Let’s do two things to help eliminate much of the noise, and help you decide where to put your investment.
1). Go back to the beginning. Remember the investment goal you set? Always go back to your goals and your investment decisions will be much easier. Keep this in mind if you meet with an investment advisor. Some of them will try to sell you an investment. Always ask if the investment meets your goals. For example, someone may try to sell you life insurance as an investment. If retirement is your goal, then you should think twice about investing in life insurance when other investments might be a better long term match for you.
2). Keep it simple. You don’t need to invest in individual companies, penny stocks, binary options, FOREX, or any other exotic investments. If you can’t explain an investment to someone in 30 seconds, it’s probably too complicated. Keep it simple. Here’s how:
Consider a target date fund. Target date funds are a mixed investment portfolio that features a variety of investments that are automatically balanced for a certain date in the future. In other words, you can buy into an investment that is entirely hands off, and that will maintain a reasonable blend of risk and reward. Here is more information about how target date funds work. Keep in mind target date funds aren’t perfect. But they are a great place to start when you have limited investment funds.
Where to find good target date funds: There are a few things to keep in mind about target date funds. They can have expensive management fees, depending on who manages the fund. In general, you will find a good fund if you choose a target date fund from one of the major mutual fund houses. Another thing to consider is the minimum investment requirement. Vanguard requires a $1,000 minimum investment for their target date funds, while some of the other large firms require a minimum of $2,000 or $3,000. Some funds require a minimum of $5,000 or even $10,000. I have had great experiences with Vanguard, and recommend them to anyone looking for an excellent selection of low fee investments.
Find a way around the minimum investment requirements. If you don’t have $1,000-$10,000 to invest in a single fund, then look at other options. Some companies allow you to start an investment with less than the minimum requirement as long as you make regular monthly investments. If you can’t swing that, then consider other options. A simple way around the large minimum investment requirement is to open an account with Betterment, which has a $25 minimum investment – making investing affordable for anyone. They primarily use Vanguard funds, and are able to remove the minimum requirement because they purchase the funds in bulk. There is a small fee to use Betterment, but it is reasonable and a good way to get started when you can’t otherwise meet the investment minimums. For more information, you can read our full Betterment review, or visit their site.
Start Today – Put Your $1,000 to Work!
Investing can seem complicated, but it doesn’t have to be. Determine whether you should invest your money, or use it for more immediate goals, create your investing goals, then find an investment to help you reach those goals. There is still a lot of work you need to do to investigate the exact investment to purchase, but following these steps will help you eliminate most of the noise and help keep you on track. If you are just starting, then keep things simple. Start with a target date fund, then learn more about the stock markets and investing. Once you have more money to invest and a better understanding of how things work, you can venture into different types of investments.